Internet Sales Tax and the Marketplace Fairness Act of 2013

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Internet Sales Tax and the Marketplace Fairness Act

ACCT 461 A – Intermediate Accounting III

Vinh P Nguyen

3/22/2014

Internet Sales Tax and the Marketplace Fairness Act of 2013

During the 113th Congress, the United States Senate voted 69-27 to pass the Marketplace Fairness Act of 2013 bill on May 6th 2013. The Marketplace Fairness Act of 2013 (MFA) is a proposed legislation that would require online vendors to collect and submit all their sales tax and use tax. The bill still needs approval from the House of Representatives before it can become a law[1].Supporters of the bill are large retailers like Sears and Target, who claim they are at a price disadvantage because they have to charge sales tax on every sale while online retailers do not. On the other side are e-commerce companies such as eBay and Overstock.com, as well as small online merchants, who say that complying with 45 state sales laws and more than 9,000 jurisdictions is too much complicated and costly[2].

According to Congressional Digest, electronic commerce has enjoyed unfair advantage for many years by not having to acquire some taxes. The government is mainly responsible for this one-sided playing field toward online sellers. Many authorities believe that the Internet is essential to high productivity and economic growth and that preservation of the Internet potential is important. Indeed, president Bill Clinton signed the Internet Tax Freedom Act law in 1998 to prohibit any Internet access taxing – extended by succeeding presidents ever since.

Based on the current tax laws, online store merchants collect sales tax from in state consumers as similarly as “brick and mortar” stores charge sales tax when customers come into their stores. Online merchants, however, do not collect sales tax from consumers who shop from a different state. Out of state consumers are subject to a different tax, a use tax which is “a tax imposed on the use of certain goods that are bought outside of the taxing authority’s jurisdiction”[3]

Logically, online sellers should also collect these use taxes from the customers and remit the taxes to the corresponding states. Nevertheless, in reality, court rulings exempted online resellers from the duty of use tax acquisition. In Hess vs. Illinois 1967 the Supreme Court introduced the Commerce Clause, which prohibits states from imposing the duty of use tax collection on sellers who have no physical contact with the states. Again in Quill vs. North Dakota 1992, the Supreme Court established that businesses must have physical presence in the state for the state to require sales tax collection.

Thus, online shoppers are the only one responsible for paying the use taxes. Still, many people are not aware that they have to pay taxes on their online purchases and few people are willing to pay the tax themselves even if they are. States lose an enormous amount of money through this loss of collection, as, according to Martin, estimation of outstanding taxes from online transactions in 2011 ranges from $4.5 billion to $54.8 billion.

Since Hess and Quill occurred for more than a couple of decades, opponents criticize that the physical presence requirement has become obsolete and unsuitable for a 21st century economy. The hope to overturn this law is entirely up to the Congress as Supreme Court explicitly stated in Quill that Congress could make changes through legislation. The Congress, however, hesitates to consider the issue because of the complexity of the multistate tax laws. Determined to recoup the missing tax revenues, states began a project through the National Tax Association in 1997 that led to adoption of the Streamlined Sales and Use Tax Agreement (SSUTA) in 2002. This agreement simplifies and modernizes sales and use tax system to lessen the burden of tax compliance. So far, 24 out of 45 states have committed to the SSUTA[4].

Built on the success of the SSUTA, the states politicians lobbied Congress to accept the legislation of the MFA in order to include other states in the agreement. The MFA seeks to simplify the sales tax systems further by offering two alternatives to the remaining 23 states. The first alternative is to become a member of SSUTA. The second alternative is to adopt a number of “simplification mandates”, which consist of installing a uniform tax base, creating a separate agency to take care of all state and local sales taxes, and supplying free software solutions to vendors for collecting taxes[5]. If the MFA becomes law, the only sellers who make less than $1m gross annual receipts will be protected by Quill[6].

According to CCIM, a commercial real estate group, they argue that the legislation does not involve new tax and that the states are only enforcing the collection of tax that they are already owned. At the same time, the legislation would not change any tax policy for the states that do not have a sales and use tax (Alaska, Delaware, Montana, New Hampshire, and Oregon)[7] Proponents of the act also maintain that the act not only lessens the burden of collecting interstate taxes in compliance with the Commerce Clause but also supports small businesses and entrepreneurship by exempting merchants with gross annual sales of less than $1 million per year[8].

Opponents of the bill, on the other hand, state that the small business exemption would only exclude a few online sellers. Large sellers need to scale down their operations to fit the description of gross sales of under $1 million. Online entrepreneurs may be discouraged and possibly find other pursuits as long as they have to deal with the prospect of collecting taxes and facing tax audits from more than 45 state tax authorities year after year. Several small business owners who run both traditional and online stores declared that uncollected online sales tax as unfair price advantage is often exaggerated and not a major issue. Web retailers do not pay salespeople to stand around and wait to serve customers but they pay the cost of product shipping to customers. Online sellers do not pay showroom space and parking lot for customers but they pay the cost of building and maintaining a Web site. The expense of operating on the web can easily eat up whatever savings the firm enjoys off the web so that electronic commerce is not really biased versus traditional commerce as supposedly claimed[9].

Currently, the MFA faces stiff opposition from the Tea Party groups that are against tax hikes. House Republicans are certain to look for ways to modify it. Senator Ted Cruz (TX-R), one of those against the bill, stated that “the government should let the Internet free from taxes and regulation that would hamper the entrepreneurial spirit and that company should be subject to taxes when they become gigantic corporations but don’t hit them when they are getting started on the Internet”[10]. In addition, Rep. Bob Goodlatte (VA-R), the Chairman of the House Judiciary Committee, which is expected to hold hearings on the measure, believes its tax collection administration is still too complex, meanwhile House Speaker John Boehner (R-Ohio) remains uncommitted[11].

In summary, the Marketplace Fairness Act of 2013 is a huge effort by many states to effectively recover remote sales tax dues. In the past, two states have failed in the Supreme Court for interfering with interstate commerce in the cases of Hess vs. Illinois in 1967 and Quill vs. North Dakota in 1992. The states are in a much stronger position following the successful implementation of the Streamlined Sales and Use Tax Agreement – a collaborative achievement between state government and business community. Nevertheless, the Marketplace Fairness Act has a very slim chance to win the House of Representatives, because in spite of its simplified and modernized tax measure, the act will not eliminate the problem of complex multistate tax policies. Since each state has its own unique laws and tax codes, it is practically impossible to compel every state to follow the same simplification tax rule. Besides, given the heated controversy and universal impact of the bill, the politicians will look for ways to slow down the enactment as similar trouble has happened to the universal Obama HealthCare. No matter if the bill is enacted or not, one thing is certain that nothing is going to deter people from shopping online (not even sales tax) because shopping online is just too cheap and convenient.

Bibliography

Internet Sales Tax. (2013, June). Congressional Digest, pp. 11-11.

Ainsworth, R. T., & Madzharova, B. (2013). Leveling the International Playing Field with the Marketplace Fairness Act. Boston University School of Law Working Paper, 13-25.

Avi-Yonah, R. S. (2013). Virtual PE: International Taxation and the Fairness Act. Public Law and Legal Theory Research Paper Series, 328.

Kenny, J. (2013, June 3). Audit the Internet Sales Tax. New American, pp. 23-24.

Korte, G. (2013, November 29). Online tax fight heats up holidays. USA Today.

Malcolm, H. (2013, May 07). Internet tax could hit all. USA Today.

Martin, M. (2012). Fair for Whom? Amazon Kindles the Fight over Internet Sales Tax. The John Marshall Law Review.

Pike, G. H. (2013, April Volume 30 Issue 4). Internet Sales Tax Proposals Back on the Table. Information Today, pp. 24-24.

Schneider, M. (2013, April 28). Quill's Call to Action: Will Congress Update Commerce Clause Nexus Requirements in Light of Cloud Computing?

Smith, S., & Wolf, A. (2013, May 20). Online Tax Bill Passes Senate; House Still Has Issues. TWICE: This Week in Consumer Electronics, pp. 4-12.

Staley, W. (2013, November 11). The Amazon Guide to Tax-Dodging. New Republic , pp. 14-15.


[1] Korte, G. (2013, November 29). Online tax fight heats up holidays. USA Today.

[2] Malcolm, H. (2013, May 07). Internet tax could hit all. USA Today.

[3] Schneider, M. (2013, April 28). Quill's Call to Action: Will Congress Update Commerce Clause Nexus Requirements in Light of Cloud Computing?

[4] Avi-Yonah, R. S. (2013). Virtual PE: International Taxation and the Fairness Act. Public Law and Legal Theory Research Paper Series, 328.

[5] Pike, G. H. (2013, April Volume 30 Issue 4). Internet Sales Tax Proposals Back on the Table. Information Today, pp. 24-24.

[6] Ainsworth, R. T., & Madzharova, B. (2013). Leveling the International Playing Field with the Marketplace Fairness Act. Boston University School of Law Working Paper, 13-25.

[7] Smith, S., & Wolf, A. (2013, May 20). Online Tax Bill Passes Senate; House Still Has Issues. TWICE: This Week in Consumer Electronics, pp. 4-12.

[8] Pike, G. H. (2013, April Volume 30 Issue 4). Internet Sales Tax Proposals Back on the Table. Information Today, pp. 24-24.

[9] Kenny, J. (2013, June 3). Audit the Internet Sales Tax. New American, pp. 23-24.

[10] Internet Sales Tax. (2013, June). Congressional Digest, pp. 11-11.

[11] Smith, S., & Wolf, A. (2013, May 20). Online Tax Bill Passes Senate; House Still Has Issues. TWICE: This Week in Consumer Electronics, pp. 4-12.

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